Q3 2019 Earnings Call
Greetings and welcome to the like an implied third quarter 2019 earnings conference call.
Time, all participants are they listen only mode. It brief question answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad.
Am I know this conference is being recorded it does sound my pleasure to introduce your host Ms. Wendy Watson director of Investor Relations. Thank you Ms. Watson you may begin.
Good morning, and thanks for taking part in Leggett <unk> Platt third quarter conference call I'm, when do you want them director of Investor relation.
With me today, our Karl Glassman, President and CEO .
Okay, Executive Vice President and Chief Financial Officer, Mitch Dollar SVP, Chief operating officer, and President of the furniture products and specialized products segment.
Perry Davis, SVP and president of the residential products and industrial products segment.
Isn't Mccoy senior Vice President of Investor Relations, and Kathy Branscomb manager of IR.
The agenda for our call. This morning is a solid Karl will start with a summary of the main points, we made in yesterday's press release.
Jeff will discuss financial details and address our outlet for the remainder of 2019 and finally the group will answer any questions that you had.
This conference call is being recorded for Leggett, <unk> Platt and is copyrighted material.
This call may not be transcribed recorded or rebroadcast without our expressed permission.
Replay is available from the IR portion of like its 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 detail those documents supplement the information we discussed on this call, including non-GAAP reconciliation.
I need to remind you that remarks today concerning future expectations, and then objectives strategies trends are results constitute forward looking statements actual results or events may differ materially do 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 and 10-Q's entitled forward looking statements and risk factors I'll now turn the call over to Carl.
Good morning, and thank you for participating in our third quarter call.
First I want to walk them, just keep our new CFO to our team and to introduce him.
As most of you.
Or likely aware, Jeff join Leggett <unk> Platt in September from the Dow Chemical company, where he most recently served as vice President and.
In business CFO for their largest operating segment packaging and specialty plastics with combined revenue of over $24 billion.
Jeff was a member of the portfolio executive team, where he drove financial discipline and provided financial Council <unk> at the strategic and operational level. So the business. His responsibilities included portfolio analysis value based strategy development business.
Its risk analysis short and long term financial planning performance measurement and analysis and in ensuring proper internal controls in prior roles, Jeff What Dallas Global internal audit activities and was drilled director of Investor Relations.
Jeff is a certified public account with a b S. An accounting from the University of Alabama. He is a member of the board of directors of P.C.L. Financial Corporation, where he served as chair of the Finance Committee add as a member of the audit risk management and compensation and pension committees.
He also previously served on the public company accounting oversight Board standing Advisory group.
Jeff brings tremendous strategic and financial capabilities to like he is well aligned with our culture and as a strong addition to our senior management team welcome. Jeff. We're excited your here [laughter] I also want to recognize Perry Davis as I mentioned last quarter Perry is retiring yeah.
Early 2020, after nearly 40 years, what leggett <unk> Platt and this will be his last earnings call is or participate we we'll miss you Barry and I suspect that you won't Miss participating in these conference calls going forward.
We have several items to highlight in our third quarter results yesterday, we reported third quarter sales growth of 14%.
Third quarter EBIT growth of 16% in adjusted EBIT growth of 19% third quarter earnings per share were 74 cents and adjusted EPS was 76 cents, a 15% increase over third quarter 2018, adjusted <unk>, Yes.
Operating cash flow in the quarter was a strong $213 million.
Adjusted working capital was or percent of annualized sales for the quarter improved 10.7%.
Our results showed a focus or teams have off cash generation. Your efforts are much appreciated.
Third quarter sales were $1.24 billion growth from you see us and other smaller acquisitions was 16% in the core organic sales were down 2%, 1% from volume at 1% from deflation at a negative currency impact.
Our automotive U.S. spring and work furniture businesses had solid third quarter third quarter sales growth offset by the planned exit of business in fashion bed at home furniture, which reduced sales, 4% and weak trade demand for steel rod and wire.
Absent declines from exited business volume was up 3%.
Our betting businesses continued to perform well with U.S. spring sales up 6% in the core finishing mattress units were up 28% than the third quarter, including year over year growth if you see us.
Automotive sales were up 8% in the quarter and work furniture was up 6%.
Third quarter 2019 earnings per share were 74 cents. This included $4 million of restructuring related charges that reduced earnings two cents per share.
Third quarter 2018, yes of 67 cents included a one cents per share benefit due to the tax cut and jobs Act.
Excluding these items adjusted third quarter earnings of 76 cents were up 10 sounds from adjusted 2018 third quarter earnings, reflecting hybrid higher EBIT and a lower effective tax rate, partially offset by higher interest expense.
EBIT benefited from that you see us acquisition, even after $12 million of amortization expense.
Lower raw material cost, including a LIFO benefit and improved earnings performance in furniture products.
Adjusted EBIT margin increased 50 basis points to 11.9% and adjusted EBITDA margin increased 130 basis points to 15.8%.
The restructuring activities, we initiated in the fourth quarter of 2018 in our home furniture and fashion bed businesses are substantially complete.
With the segment's adjusted EBIT of $12 million in adjusted EBIT margin up a notable 470 basis points in the quarter. We are already seen a positive impact from a lower fixed cost and improve pricing.
We have further restructuring in the third quarter from the closure of a small machinery facility in our residential product segment and a wire drawing facility in our industrial products segment.
We now expect full year restructuring related charges, a $14 million 7 million, a which is non cash.
We also wanted to update you on the automotive market year to date production in the global markets is down 6% and is expected to be down approximately 6% for the full year.
Our automotive business grew 8% versus third quarter 2018 exceeding global market growth by over 1000 basis points. This year, we should exceed market growth by 600 to 700 basis points.
We remain confident in our continued strong performance ongoing disruption of the global markets makes it difficult to predict our relative performance with precision.
Accordingly, we are moving away from our specific goal of exceeding market growth by 1000 basis points, although we still expect to significantly outperformed the market over the long term.
In mid October we received more positive news from the United States Mattress industries anti dumping that petition on imported Chinese mattresses. The department of Commerce made a final determination that Chinese mattresses are being sold at prices that violate the U.S. trade laws.
And imposed final anti dumping duties that range from 57% to 1732% in.
Importantly, approximately 90% of Chinese mattresses, or now subject to anti dumping duties in excess of 160%. We expect the United States International Trade Commission to make a final determination in the anti dumping matter no later than the first week of December .
I'll now turn the call over to Jeff.
Thank you Carl and good morning, everyone.
As previously mentioned operating cash flow was a strong $213 million in the third quarter, an increase of $86 million first the same quarter last year.
Another quarter of keen focus on working capital levels, what's reflected by our core and adjusted working capital as a percentage of sales at 10.7% and improvement versus 12.4% and the second quarter and 12% in the third quarter 2018.
We now expect our full year operating cash flow to exceed $550 million.
Demonstrating our ongoing capital discipline, we're reducing our full year capital expenditure estimate from $180 million $260 million and dividends should require $205 billion for the year.
During the third quarter 2019, we have returned over $180 million, an offshore cash and expect to bring back an additional $50 million before year end.
This significantly exceeded our original for your expectation to bring back $170 billion of offshore cash.
We ended the quarter with debt at 3.15 times, our trailing 12 month pro forma adjusted EBITDA.
An improvement over second quarter, 3.4, or five times.
As we announced yesterday, we're raising our full year earnings per share guidance range for 2019, 2040 cents to $2.55 from a range of 2030 cents to 2050 says, including approximately eight cents per share a restructuring related cost.
Accordingly full year adjusted earnings per share is expected to be $2.48 to $2.63.
Based upon this guidance framework, our full year adjusted EBIT margin range should be 11% to 11.3%.
Our next for share guidance of some of the full your effective tax rate of 22%.
Full year, depreciation and amortization of $200 million net interest expense of $85 million and fully diluted shares of 136 million.
We are narrowing our full year sales guidance expectations to $4.7 billion to $4.8 billion or up 10% to 12% over last year.
Acquisition stood at 15% year over year growth.
We expect our organic sales to be down, 3% to 5%, including a 3% reduction from plant exited business in fashion bed and home furniture.
We also expect full year sales growth and use spring automotive work furniture adjustable bed and aerospace.
And finally I'd like levels, we invite you to our Investor day on Monday November 18th in New York City.
We will webcast the that which will take place from 830 am to noon eastern time.
The webcast and slides will be available on the Investor Relations section of our website.
Please contact Investor relations for more information and to sign up.
With those comments I'll turn the call back over to Wendy.
That concludes our prepared remarks, we thank you for your attention and we will be glad to answer your question in order to allow everyone an opportunity to participate we request that you ask only one question and then yield to the next participant if you have additional questions you're welcome to reenter the queue and we will answer those questions as well.
[noise] Jesse we're ready to begin next year any session.
Thank you, ladies and gentlemen, we will now be conducting the question and answer session. If you would like to ask a question. Please press star one on your telephone keypad. The confirmation from the indicate that your line is on the question Q You May Press Star too if you would like to remove your question from the Q4 participants using speaker equipment and may be necessary to pick up your handset.
Before pressing the star keys, one moment, please let me pull for questions.
Thank you. Our first question comes from Bobby Griffin with Raymond James. Please proceed with your question.
Good morning, everybody Oh, congrats on a quarter I. Appreciate you taking my questions I guess first Perry Congrats on retirement in an impressive career I've really enjoyed working with you over the years. So I wish you nothing but the best going forward.
Thanks, Bobby I appreciate that.
And now Jeff welcome to the company I look forward I mean, you at Investor day in getting to work with you as well as we as we move forward.
Thank you Bobby looking forward to it so.
Of course is really just kind of more of a high level question on bedding and the shift that's going on from open innersprings into the comfort core pocket of units can you maybe update us on on where you see the runway of that going in the U.S. as there's still room for further penetration and what's the penetration today versus the penetration of pocketed coil and Europe for instance.
Well I Bobby its a.
Maybe be a pool and to ask it's exceeded my expectations for sure over the last few years.
In the in the third quarter, four legged our growth and comfort core.
Was up 20 little over 22% year on year. So now as a percentage of total inner springs, and our business. If you look at KMP record, it's about 60% a run rate in the third quarter.
And of that.
The comfort core.
Our quantum edge products are those products that have basically replace Qualcomm with springs.
As a percent of comfort core quantum edge and it.
Enhanced products or about 48% of the total a comfort core so it's almost half at this point well beyond what I thought I thought a one point, we my top out at about 40%, that's not the case and more and more customers are seeing the value.
Both in their manufacturing efficiencies and the in the true benefits that can be different.
Demonstrated to the consumer end.
No spring enhance products by the way that's it's not in quantum consequential also that we're seeing more and more of that product in compressed role madrassas as a built in edge support it truly does provide a benefit that the customer can readily see.
Okay is there still a few large customers that have an adopted all the way to quantum edge.
There are a we'll see more introductions as we go forward into January at the biggest market and we expect that to further grow it just makes too much sense from.
Manufacturing standpoint.
From a compression and packaging standpoint, and from the consumer benefit.
Okay, and then lastly from me I was hoping maybe just to get a little more detail around the moving parts with updated full year guidance, we saw sales ticked down slightly at the midpoint, but as come up I'm actually come up versus prior prior expectations can we maybe unpack a little bit of what's first driving the sales reduction at the midpoint is it.
Further incremental deflation uncertainty around auto or uncertainty around the external sales for wire and then maybe connect that on on what's driving the P. S a little bit higher as well.
Good morning, Bobby as Carl.
Really the changes since we last issued guidance, which as you know was the end of July .
Sales midpoint that slight reduction uncertainty is is really the key word.
Deflation has become more apparent scrap has traded off more aggressively since we issued last guidance than we expected. So we're starting to see some reduced selling prices first in the industrial segment that will ultimately move to residential that's actually good for margin.
Because of the delayed like so it's a.
Kind of a.
Negative positive if that makes any sense and as a as we continue on you hit it digest data on automotive continues to reduce.
Yeah, that's kind of an accelerated rate we think the majority of that was the call was caused by the GM strike. So from our data point, we would have had the impact of this right for just a couple of weeks in the third quarter certainly all of October in the fourth quarter and even though the odd.
No workers to ratify the the the election that we don't know to what degree that the supply chain will ramp up so there's some uncertainty and with that slight downshift, we've allowed ourselves a little bit of cushion for that uncertainty as it relates dps.
We're dealing with a lower than expected tax rate, you'll notice that our third quarter tax rate came in very favorably to forecast and I really need to call out our people. They did a wonderful job, bringing back this offshore cash at a lower rate than we originally expected.
So that drove lower tax rate lower interest expense or people have done a great job of cash generation. So we have.
More cash lower interest rates from a mattress from a macro perspective, so thats driving part of it. We're also seeing improved margins again from the deflation and from the terrific job. There are people have done on the restructuring of the furniture products segment, so roll that out altogether slight down.
Draft on top line again, it's just a testament to on macro uncertainty and pick up as for all the reasons I listed.
I appreciate the detail Carl that's very helpful and I'll jump back into queue best of luck in the fourth quarter.
You Bobby.
Thank you. Our next question is from John Baugh with Stifel. Please proceed with your question.
Good morning, like a team and the very best wishes and retirement.
Thanks, John .
Let's see so.
We may be start either barrier Carl was [noise].
Where you see us is tracking on.
You see us to SCS year over year performance and maybe you know since you've acquired or year to date and then.
Comment on needle if pricing deflation is influenced the revenue figure at all how is it has a tracking relative to expectations.
Well John Yes in answer to your question has has.
Deflation.
Definitely is impacted topline there significantly.
We kind of a new at the time of the acquisition in the months, leading up that we were looking at some pretty historically high chemical input costs and that those were likely to Paul overtime, but more importantly, we wanted to look at what.
EPS could generate in terms of margins through that downturn as that began to turn around and we became comfortable with their ability to recoup those costs when.
And assuredly they will go up at some point overtime, it's a commodity but we became really comfortable with the pricing power in the marketplace with the.
Uniqueness of the product offerings that they had and the position they had in the value chain. So.
There's a commented in our release with regards to 28% increase in their finish matters product products year on year. That's that's a total of if you took the historical 2018.
Yes, and the leggett.
Pieces that were produced in terms of finish mattresses, and then you'd let just look at this year. The total amount is up 20%. So thats certainly met our experts expectations in terms of double double digit growth, it's just kind of hitting a little bit because of the massive deflation impacts that we've seen.
Okay. So.
I would you add the things that have most surprised us about SCS is certainly the rapid deflation that very made reference to the other thing is really kind of goes back to Bobby's question in the incredible rate of adoption of hybrid.
Pressed mattresses in every channel of distribution in this country has been really remarkable so that element of Vcs has exceeded expectations. We are really really pleased with the way you see us is tracking.
So I don't know the Leggett finished mattress pieces from a year ago, but the bottom line is.
Did you see a standalone is still tracking at a double digit kind of fitness mattress.
Figure for year over year, if I understood that correctly that that's correct. The leggett finish mattresses over a year ago wall important to us we're in a relatively insignificant to the total you see us number.
Okay.
Rod and wire was down I think at 12% in demand and I was wondering if you could.
Tell us what areas are customers are weak there and what the prospects are there kind of near term.
John It's just it's trade.
It's macro uncertainty in the United States, it's kind of all markets, you'll remember that about 30% ferried out might even be a smaller number than that of our of our total production get sold into the open market and it's just general softness in all of those industrial markets.
Okay.
And.
Hi, I saw that.
Hydraulic sales were down 12%, but it looks like pricing was up is there.
Is there anything going on with that that business with simply was newly acquired.
John preparing a higher looking forward to Mitch topic.
[laughter] Oh.
Hey for very premium in the John .
Yeah, it's really more of that the industry phenomenon there we saw.
The global industrial trucking unit volumes, which includes material handling equipment, which is a core market for four Phd were down fell 5.4% year over year in Q3 and down almost 8% in the second quarter and our customers there which are generally the leading forklift producers are seeing demand.
And drop 10% to 15% in North American 15% to 20% in Europe .
So we're seeing those declines in our business early as supply chain catches up to the long lead times that we had in 2017 in 2018 volumes were up over 50%. So we're going to environment, where we couldn't keep up to now one where we see pretty significant declines in demand. So so thats really that's a phenomenon there.
Pressingly ironies were roughly flat because last year, we were struggling to pass through raw material cost inflation. So thats, what youve relates to your pricing comment basically we've just caught up our pricing to the material costs.
Which sort of offset the volume declines that we had this year. So we're taking action to reduce head counts and take other costs outside response to volume declines.
Okay. Thanks, and my last question is on one we anniversary the drag from exiting the fashion bid in parts of home furniture, and the EBIT increase was called out of furniture or just.
Quite good I know it said pricing and costs were down but is this merely a function of exiting.
These businesses or the remaining legacy business is stronger in addition to that.
I think it's both John I think that we're benefiting from exiting who is low margin business, but also benefiting from making sort of structural improvements in that business. So we have better pricing discipline, we've taken excess capacity offline and we've taken significant cost out for a moment both from a manufacturing.
Endpoint, but also furniture overhead standpoint, so we think that.
Restructuring has had its intended effect, but also put us in a position to be more stable and more profitable going forward.
Two year anniversary I think our home furniture, we probably see.
Sure.
Don't have a full year this year of some of the business that we exited so we'll see a little bit impact from a sales standpoint next year, but I think we'll see continued margin improvement.
And then from the fashion bed standpoint, we're pretty well ramp down.
By the end of the third quarter from a sales standpoint.
So I'm trying to I mean remember here. So you basically have no sales repeating next year, we have a small hospitality business that we're looking to exit but that's about.
$50 million. So I think our 2019 sales there will be 65 to 70 million and so those will repeat next year.
John This is areas various one additional point you you had to ask as part of your original question and I just want to make sure that we answer it.
With regard to Europe , and comfort core so as I said.
Comfort core in the U.S. four legged is approaching 60% bear in mind in the U.S., we play and all the different areas of the value chain pretty strongly whether its promotional ultra premium in Europe .
So much the case, we tend to trend more towards the the upper end or the mid to upper end part of the markets or comfort core as a percentage of total innersprings in Europe represents a higher percentage of our sales.
There are a lot of low cost.
Bonneville an open coil inner springs in that market that are imported and we don't tend to play so much in that market historically have not so comfort core would represent an even higher percentage of our sales in Europe .
Great Thanks, and good luck.
Thanks, John .
Thank you. Our next question is from Daniel Moore with CJS Securities. Please proceed with your question.
Hi, good morning, Miss a separate us Chris calling for Dan.
Morning.
In residential poor weather was impacted a lot of companies in Q2, particularly in housing.
Many of them have seem to come back.
Do you think your customers experienced the shift in demand from Q2, the Q3 and what are you seeing so far in Q4.
Yeah, I think in certain businesses, Chris It. It has had an impact a we've seen a little bit a challenge in terms of for instance, in our flooring products group with volumes.
But that's a factor a lot of that product gets sold into multifamily housing also the amongst our major customer groups, we have seen a bit of a negative impact on volume some of that which you likely could lay on to the to the weather, although we normally don't like to.
I do that.
But but yes definitely in a few of those businesses, we would see that and they are probably with some impact in our geo components business, but again, the Barrys point, Chris We generally don't talk much about whether it's in the sum total of things it's not significant.
Got it thanks.
And then how much of a remaining volume headwind do you expect from divested businesses and in Q4.
That's it for another 4% down in volume from the exited business import in Q4.
Basically the same as Q3.
Got it alright, thank you.
That's it from it.
Thank you. Our next question is from Keith Hughes with Suntrust Robinson Humphrey. Please proceed with your question.
Thank you.
Questions on slide 14 your assumptions.
For the year, specifically in residential products, you talk about flat organic sales.
Which would mean.
That's a rough math kind of another negative organic number in the fourth quarter after a pretty solid number in the third.
Talk about what's driving that down sounds like you see us maybe part of it but just kind of the nuts and bolts will be Greg.
[noise], Oh, yes, sorry, if we need.
We expect that continue to see nice growth in U.S. spring in residential in the fourth quarter at leasing softness in a lot of our other businesses and flooring has been down this year and we expect to see back continue they've got some deflation and Thats numbers chair. So that's that's the primary driver as a flat organic sales in.
Fourth quarter, and ramping and deflation to bigger yes, you in the fourth quarter, two and as that continues to roll through Keith kind of think to Susan's point. Thank of deflation in Threeq, you, having a greater impact in the industrial and in Fourq you starting to have an impact in residential okay.
And specific Dcs talked about it could that earlier.
You look at your projections for 19 with the EBIT dollars that he see us how would they compare to the EBIT dollars and now talking about margins, but just dollars.
EBIT dollars would be.
Compared to the original projection.
Think about Wendy's.
Test me on it.
Jack meal and probably test.
Yeah.
Yeah pretty pretty close I mean, they they're not projections that 18 hours of doing Bert and what I'm trying to get to as you've seen deflation in the business, but of course, there inputs have gone down as well I'm just trying to capture other spread on this works.
It's going to be.
Lastly, you yeah, it's going to be flattish with.
The part that will be down UK attribute absolutely to deflation.
Okay. So when vcs these deflation in there and the end user markets on that out saying deflation in the inputs coming on as well.
Yes.
In a in the chemicals in the chemicals, yes, yes.
Okay. So the.
So I mean theres a lot of gross on their business. It sounds like in terms of units. So it have there have there just dollars not gone up notably in 2019 versus 18.
Hi, Matt well I think keep that's generally true they the.
The number Oh pieces and the demand environment. We started in Turkey is seen in terms of just sheer numbers not only looking at at mattresses, but in.
In.
Some of the other important parts of their business in a finish foam products generally toppers pillows those types of things, yes, we've seen tremendous demand growth there.
We have actually had certain points over the last quarter, where we have throttled back some of our order acceptance because we just simply had some capacity concerns, which we're addressing as we speak we've added lines for additional matters production, we change some flow layout.
Some things in order to get better efficiencies within our manufacturing operations, but again that handicap handicapped when you look at it in terms of dollars by the overall pretty severe.
Deflationary environment again.
A little under half at last count of our.
Mattress volume in that space was under contract. So we see much as we do in our steel related businesses, we see a kind of a delayed.
Deflation picture as we take those days decreases down and they don't all happened at once they have been overtime, because we saw an incremental step down in our raw material inputs.
And just Keith we saw nothing corridor well sales dollars were up that was even after roughly 11% drag from deflation.
Okay. Thank you and that's all for me thanks.
Thank you as a reminder, ladies and gentlemen, if he would like to ask a question at this time. Please press star one on your telephone keypad.
Our next question comes from Peter Keith with Piper Jaffray. Please proceed your question.
Hi, good morning, everyone.
Body finger on for Peter Thanks for taking your question and nice results.
So to discuss gross margin, so NAV seem to quarters with nice year over year improvement southern tide discuss in more detail the different pockets that are contributing to the improvement no. One has got the Q4 in early 2020, I'm thinking about sustainability.
As margin expansion. Thanks.
Hi, Bonnie this is Wendy it's really the drivers be coins behind our gross margin and they have to do with volume growth in our more profitable business says that the puts and takes we talked about from exiting the low margin business and then the reverse lag. Unlike our benefit were seen from deflation.
And then relative to 2020, we certainly will guide for 2020 until we get to February and we announce a full year earnings, but where you know it's as much discussed we will continue to see some of the benefit in our home furniture business on the in prison that we're seeing.
Expectancy, those improvements ongoing and actually see more profitable businesses during loudly.
Be pleased with that performing.
Okay, and I guess, just as a follow up still crackers still seem to be running down significantly year over year.
Expect continued Michael benefit in Q4.
Yeah, our full year estimate is 24 million. So we would expect a roughly 6 million dollar LIFO benefit in the fourth quarter.
You know in the fourth quarter, we true it up to actual so that 6 million has an estimate and I'll be around that well, let you know what the actual as only report for the full year.
Okay. Thanks, a lot.
You bet.
Thank you. It appears we have no additional questions at this time, so I'd like to pass the floor back over to Miss Watson for any additional concluding comments.
Thank you everybody and we will talk to you next quarter.
Ladies and gentlemen, this does conclude today's teleconference. We thank you for your participation and you may disconnect your lines at this time.