Q4 2019 Earnings Call
At this time all participants are in listen only about a brief question answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
Now my pleasure to introduce your host Ms., Wendy Watson, Vice President of Investor Relations for Leggett <unk> Platt. Thank you you may begin.
Good morning, and thank you for taking part in Leggett <unk> Platt fourth quarter 2019 conference call I wouldn't be Watson with me today are Karl Glassman, Chairman and CEO, Mitch Darla, President and CEO, Oh, Jeff <unk> Executive Vice President and Chief Financial Officer and season look like senior.
The president of Investor Relations.
The agenda for our call. This morning is a solid Karl will start with a summary of the major statements. We made in yesterday's press release.
Jeff will discuss financial details and address our outlet for 2020 and finally, the group will answer any questions that you had.
This conference call is being recorded for like it in class and is copyrighted material. This call may not be transcribed recorded or rebroadcast without our expressed permission.
A 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.
The documents supplement the information we discussed on this call, including non-GAAP reconciliation.
I need to remind you that remarks today concerning future expectations events objectives strategies trends are result constitute forward looking statement.
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, Thank you for participating in our fourth quarter call.
First I want to think or dedicated fellow employees around the world for your efforts during this past year.
In 2019, our employees accomplished the acquisition and integration of E. C. S. The largest acquisition in our history. The very successful restructuring of our home furniture business, where we are already seen an EBIT margin benefited the orderly closure.
Of our fashion bad business and successful liquidation of that inventory all while keeping a sharp focus on de leveraging.
Generating record cash from operations and delivering 48 consecutive annual dividend increase this represents tremendous work by our employees across the company and these efforts are very much appreciated. Thank you all.
As a reminder, in November we filed an 8-K that disgust changes to our segment structure. These changes are aligned with how we manage our businesses affective January 1st 2020, all of our bedding related businesses, including our innerspring, especially foam businesses or Steve.
Sure Rod and wire and machinery businesses, and our adjustable bed business will be one bedding products segment.
This optimizes efficiency and allows us to holistic, we manage our betting value chain rod and wire spring specialty fall.
The newly formed furniture flooring and textbook product segment will contain our home and work furniture businesses are flooring products business and our fabric converting and Geo components businesses are specialized products segment is not changing and includes our automotive aerospace and.
Hydraulic cylinder businesses.
The segment commentary in yesterday's press release is based on the historical reporting format. As we continue to report under the prior segment structure through 2019.
Before we report first quarter 2020 earnings we will flourish an 8-K for body in five years of historical segment data based upon the new segment reporting structure.
We have several items to highlight in our 2019 performance for your sales grew 11% EBIT grew 18% in adjusted EBIT grew 12%.
Full year EPS was $2.47 and adjusted EPS was $2.57, a 4% increase over 2018 adjusted EPS.
We generated record operating cash flow of $668 million [noise].
Adjusted working capital as a percent of annualized sales improved to a low 9.9% eight year round.
We experienced fluctuations in sales and earnings from the effects of raw material costs, primarily steel scrap cost in selling prices for steel rod wire innersprings, along with corresponding movements in LIFO benefit for expense.
We passed our steel cost increases or decreases along to our customers. After an approximate 90 day lag.
Because of this lag in the first half those 2019 are selling prices for steel rod wire in Innersprings increased from the recovery of cost inflation that occurred in 2018.
At the same time, our cost for steel scrap where deflating.
This had a positive impact on both sales and earnings as sales dollars were increasing and earnings benefited from the lower cost.
In the second half of 2019, we began to pass or lower lower steel scrap cost along to our rod wire innerspring customers.
Despite the downward effect of our sit on our sales dollars. We continue to experience earnings growth from steel cost deflation through October of 2019.
We also experienced increased earnings from LIFO benefit as steel cost deflated.
Steel scrap costs began to rise in November 2019, and have continued inflating through January of 2020.
We expect steel movements to cause sales and earnings fluctuations in 2020, and anticipate negative earnings impact in the first core.
We also expect year over year changes in life as we had a 32 million dollar LIFO benefit and 2019.
As the quarters progress, we will update you on the changes in steel scrap and rod at our full year LIFO expectations.
Well, we are most affected by moves in steel scrap and Rod. We also experienced a negative effect on sales from bonus chemical deflation in our SCS business that I will discuss later in the call.
Fourth quarter sales increased 9% to $1.14 billion. The easiest acquisition added 13% to sales in the core organic sales were down 4%, 1% from volume and 3% from raw material related price decreases.
We had a negative currency impact most of our businesses grew in the fourth quarter. The growth was more than offset by the planned exit of business in fashion bed at home furniture, which reduced sales, 3% and continued weak trade demand for steel rod and wire.
Absent declines from exited businesses volume was up 2%.
We are pleased with the performance of our betting businesses in the quarter U.S. spring sales were up 7% International spring sales were up 4% and adjustable bed sales were up 22%.
In addition, our automotive business was up 8% in the quarter, while global auto production was down 5%.
Our aerostat space business was up 11% than the core.
Fourth quarter, EBIT increased $51 million over fourth quarter, 2018, and adjusted EBIT increased $20 million were 17% to $140 million.
Adjusted EBIT benefited from the easiest acquisition, even after $12 million of amortization expense.
Lower raw material costs, including LIFO benefit and improved earnings performance in furniture products. Adjusted EBIT margin increased 70 basis points to 12.2% and adjusted EBITDA margin increased 160 basis points to 16.4%.
Fourth quarter earnings per share were 64 cents. This included restructuring related charges that reduced earnings four cents per share.
Adjusted fourth quarter earnings were 68 cents per share a 10% increase versus fourth quarter of 2018, the increase in fourth quarter earnings reflects higher adjusted EBIT, partially offset by higher interest expense and tax rate.
For the full year 2019 sales grew 11% to $4.75 billion, you see us and other smaller acquisitions added 14% to sales organic sales were down 3% on 3% lower volume raw material related so.
Selling price inflation from increases implemented in late 2018 were offset by a negative currency impact.
Full year organic sales growth in most of our businesses, including U.S. spring automotive work furniture, and aerospace was more than offset by the planned exit of business in fashion bed and home furniture, which reduced sales, 3% and we trade demand in steel rod.
And wire volume was flat for the year absent declines from exited business.
Content gains continue to drive sales growth and both are betting and automotive businesses in 2019, U.S. spring sales were up 6% Ben benefiting from the continued shift to higher value Innersprings, our automotive sales were up 2% for the year with global auto production.
Down 6%.
Full year, EBIT increased $76 million, and adjusted EBIT increased $56 million or 12% to $529 million adjusted EBIT benefited from the easiest acquisition, even after $50 million of acquisition accounting.
Lower raw material costs, including LIFO benefit and improved earnings performance in our furniture products segment.
Full year earnings per share increased to $2.47 adjusted earnings per share increased 4% to $2.57. Adjusted EPS benefited from higher EBIT, partially offset by higher interest expense and tax rate.
In January 2019, we acquired elite comfort solutions and gain critical capabilities and proprietary foam technology, along with scale in the production of private label mattress finished mattresses.
Yes is full year 2019 sales were flat with 2018, primarily from deflation and weaker demand in non betting markets volume was up 11%.
As expected you see US is EBITDA margin is accretive to our total company EBITDA margin and their cash flow generation is strong.
In the fourth quarter of 2018, we initiated restructuring activities. After an in depth analysis of our fashion bed and home furniture businesses total restructuring related charges were $15 million in 2019 and $16 million in 2018, the restructuring active.
He is substantially complete.
In November the U.S. mattress industries anti dumping petition on imported Chinese mattresses came to a successful conclusion with the international Trade Commission, making a unanimous final determine the determination that the U.S. industry had been materially injured by Chinese.
Mattresses sold at prices that violate the U.S. trade laws.
Jeff will discuss our 2019 financial details and full year guidance for 2020, I'll now turn the call over to him.
Thank you Carl and good morning, everyone.
In 2019, we generated record cash flow from operations of $668 million, a 228 million dollar increase over 2018.
This improvement was driven by significant reduction in working capital across the company and strong operating cash generation and many of our businesses, including SCS.
We ended the year with adjusted working capital as a percentage of annualized sales of 9.9% and improvement versus 10.6% at the end of 2018.
In addition, we brought back $96 million offshore cash in the fourth quarter, bringing our full year totaled $279 million.
In November we declared a 40 cents per share quarterly dividend, a 5% increase versus the fourth quarter of 2018.
Yesterday's closing price of $46 a 96 at the current yield is 3.4%, which is one of the higher yields of money S&P 500 dividend aristocrats.
Consistent with our deleveraging plan share repurchases were limited in 2019 for the full year, we repurchased only 700000 shares of our stock primarily surrendered for employee benefit plans at an average price of 44 hours and 20 cents.
We issued 2 million shares primarily for employee benefit plans and stock option exercises.
From an acquisition perspective during the year, we acquired yes, and once molecule component operation.
We also continued investing capital to support organic growth opportunities.
Total capital expenditures in 2019 were $143 million, 10% lower than the prior year, reflecting a balance of investing for future while controlling our spending.
Our financial base remains strong we ended 2019 with debt at 2.9 times, our trailing 12 month adjusted EBITDA.
We remain committed to maintaining a strong investment grade credit rating and continue to expect to de lever to a ratio of debt to trailing 12 months adjusted EBITDA of approximately 2.5 times by the end of 2020.
We expect to accomplish this by limiting share repurchases controlling the pace of acquisitions and using our operating cash flow to repay debt.
With that our overall performance by comparing our total shareholder return to that or peer companies on a rolling through your basis.
Our target is to achieve TSR in the top third of the S&P 500 over the long term, which we believe will require an average TSR of 11% to 14% per year.
All right well TSR was below the 11% to 14% target and both 2017 as well as 2018, but significantly above the target in 2019.
Over the same years the TSR the S&P 500 was well above historical averages.
As a result, our recent through your performance did not meet our top third goal.
However, we believe our disciplined growth strategy portfolio management and prudent use of capital will support achievement of this goal overtime.
Now moving to a discussion of our 2020 guidance.
2020 sales are expected to be in the range of 4.7 billion to 4.9 billion or down 1% to up 3% over 2019.
Acquisition in 2019 stood at 1% to sales growth and 2020.
Raw material related price decreases implemented in the second half a 2019 shouldn't lower sales 1%.
We expect mid single digit volume growth in 2020 for most of our major businesses.
This includes automotive you esprit easier with aerospace Geo components and work furniture.
We also expect the growth in these businesses to be offset by approximately 1% a further year over year sales decreases from plant exited volume and both fasten bit and home furniture.
As was continued weak trade demand for steel rod and wire.
So absent exited business volume is expected to be flat to up 4%.
2020 earnings per share are expected to be in the range of 2040 cents to 2060 says.
Reflecting earnings growth in our automotive bedding and other businesses to be more than offset by increasing steel costs, including the nonrecurrence of 2019 LIFO benefit.
Additionally, we expect increased cost in 2020 because of investments, we're making to support the growth security and continuity of the company.
These investments include network and cyber security upgrade and personnel to support those activities. We're also investing in our human resources organizations and related technology.
Finally employee benefit costs are increasing due to a valuable change we made to our four when K plan, adding employee auto enrollment. We're very pleased that this change increased employee participation rates and the for what they plan.
Earnings per share guidance assumed the full year effective tax rate of 23% versus 22% in 2019.
We expect 2020, depreciation and amortization to approximate $200 million net interest expense of approximately $80 million and fully diluted shares of 136 million.
Based upon this guy this framework our 2024 your adjusted EBIT margin should be in the range of 10.7% to 11%.
Cash from operations should approximate $550 million in 2020.
Capital expenditures should approximate $160 million for the year and dividends should require $220 million of cash.
Finally, we know impacts from the growth of ours are top of mind for many of you and we're closely monitoring global development.
Our current 2020 guidance does not include possible impacts from the virus.
It's still too early to develop reasonable quantitative data related to the impact.
Our first priority is the health and safety of our employees around the world.
Our employees in China, we've extended the lunar new year plant shutdowns in accordance with Chinese provincial and local government extensions.
We are establishing protocol and all 16 of our Chinese facilities to better protect our 50 to 5200 employees in China when they can return to work.
And for all negative Plaid employees around the world, we've implemented a travel bad to Asia, and our civilian restricting all international travel.
We're assessing the potential impact of this pandemic on our business, including demand for our lift in our customers goods.
Vittoria availability through our our supply chain as was our customer supply chain, the global movement up good and workforce availability.
We do not anticipate that there are factors unique to us that would cause the impact from this corona bar is to be greater to our company than our global manufacturers.
Then other global manufacturers.
We can see it too much of this situation and we'll take all reasonable mitigation steps FX unfold.
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.
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 question.
Welcome to reenter the queue and we will answer those questions just laugh Melissa we're ready to begin the Q any fashion.
Thank you.
She would like to ask a question. Please press star one on your telephone keypad a confirmation total indicate your line is in the question Q you made fresh start to if you'd like to remove your question from the Q from participants you think speaker Clinton it may be necessary to pick up your handset before pressing the starkey.
My first question comes from the line of Susan Maklari with Goldman Sachs. Please proceed with your question.
Hi, good morning, everybody.
Good morning season.
I guess my first question is just can you talk a little bit too.
For core maybe in the quarter overall bedding how is that good anything that we should be aware of in the channel as we head into the presidents day weekend and kind of the sales events around that.
Sure.
As Mitch Susan so for a comfort core.
It's continued to be very strong on the U.S. screen side, they were running at about 62% of of units for the quarter and about 48% of of those included our quantum edge as well.
On so I think that.
The bedding outlook continues to be strong I'll, let karl comment on any.
Any trends going forward into that the holiday.
Good morning, Susan that as Mitch said, the continued adoption of comfort core driven somewhat by the growth of hybrid mattresses, both compressed and uncompressed.
It is at a level at a rate of 62% for the quarter, 56% for the year that we didn't anticipate so we're pleased with that with the launch of new product lines at the Las Vegas market, which was last weekend that there was a greater.
Introduction of comfort core.
The the bedding industry feels pretty optimistic in terms of that theres relative stability in that industry, which is kind of it change compared to last five years and advertising investment seem to be in place new product launches. So theres excitement around there. So we feel pretty good Presidents' day.
Is is a tough one to all I know there will be a heavy advertising going into it but it's always one of those holidays. This performance is subject to weather just because of being in February, but there's a build up to it.
Were worse I embedding what was a great story and 29 gain and we expect this inventory going.
Okay, great that that's very helpful. And then you gave a lot of color around the impact that you've seen over the last year and then into the beginning of this year from from steel prices and understanding that it's kind of hard for you to project going forward, but can you just kinda give us some sense of maybe what's going on in that market can you talk to the weakness.
Of trade demand in your Rod and wire segment in there. So can you just talk a little bit to how we should think about that as we move through 2020, what's driving that weakness in demand.
Any other color there.
Yeah, Let's talk first pricing and then we'll go through weakness in trade demand, which is very different than our internal demand, but what happened is a continual deflation of input costs as 2019 progressed Intel November where we saw the.
First move up in scrap so we saw steel scrap in flight in November at a rate of $20 a ton followed by $25 a ton in December and then $30 a ton in January so we're dealing now with kind of the reverse lag effect from the standpoint that is prices.
Deflated in 2019, we kept that benefit for 90 days were flipping that situation in 2020, but because of the kind of the oddities of year end, we actually are decreased our customer prices in January of 2020 Bill.
Goes we adjust every quarter so were those contracts actually in the face of our increase in input cost, we lower prices because a lag effect, we will be increasing our customers prices starting in April so with that there is a LIFO swing.
There is zero impact of LIFO expense in our forecast for 2020, as we laid out guidance, but who the heck nose to your point. So that's what's happening from a pricing standpoint from a trade market perspective again. This is trade. So think think of us for about the 25 or.
Center, the total tons that we produce from the perspective as you would a large public steel company.
In that case, we're like them from the standpoint that our metal margins are okay margins aren't so bad because of the deflation cycle, but the demand is incredibly soft it's not specific to any particular sector. It's just macro us economic.
And export demand for steel products in virtually every channel of distribution. So people may question, we'll wait a second the steel U.S. steel industry was protected by Trump tariffs last year well the products wart. So there was a continue inflow of products in an environment where export.
Demand was very very soft so from a trade perspective, that's really what happened in 2019, and we don't see a change in that in 2020, So I apologize for the long winded answer, but steel moves are really really complex.
No. That's that's very helpful. It sounds like it's having a you know quite a and impact on the 2020 in how we think about the guidance that that's really helpful for us and it really like quarter perspective, Susan. So expect one cues is going to be negatively impact, but impacted by that pricing decrease Walt.
Costs are rising so yes, it is impacting the kind of the quarterly sequencing.
Okay, and then as we go through the year, though your comps also in markets like I know that the segments are going to change so it's going to make it a little.
That's going to change things as well for us, but the comps get a little easier and.
And as we move here.
From a revenue so said differently will become more fully recovered.
From a margin perspective, but to revenues you are right because we have the the business that we appropriately walked away from that still impacts us in the first after the year that we anniversary so fashion bad that kind of headwind to fashion that really goes away in the back.
Half the year, but we still deal with that legacy exposure in the first half and home furniture has a little of that that same situation, but we'll move doing inflationary device environment, which will help offset some of that from about 1% season I'm. Sorry go ahead and take an opportunity here really quick so you didn't specifically asked the question.
How about kind of progression of sales guidance and.
And margin.
Sorry progression through the year, but Carl has introduced that idea already so I'll have to complete that discussion by saying just to be clear.
As we look at quarters.
Due out 2020, we expect sales in the first half of the year to be down slightly and then in the second half the year to be absolutely and saw the stuff that he was talking about you guys just alluded to there's more impact from the X's volume in the first half of the year we've got.
It does that slipped from.
Deflation to inflation, but the second half of the air we expect of anniversary Mr that exit volume. So that's on the sale side on the earnings side, we would expect to see our quarterly margins.
Margin trend to be very similar to what we experienced in 2019, including the first quarter being lower than our expectations for the resi and that gets to this deal like that Carl is talking both slip on the steel side and then for the full year we would.
Pattern that margin progression basically to be flat to down slightly versus each quarter in 2019, and then for the full year 2019.
Okay. All right. That's very helpful. And then I assume like as we get closer to you restating the information according to the new segment to well get some of that historical so we'll have a.
So how to model it going forward.
Yes, okay. It absolutely will help things, having the historic industrial in residential pulled together in this baiding betting segment I think it should help because there's been this kind of offset you had to read through to try to figure out where the impact and when the impact in industrial was rolling through residential.
So I think it will help you from an analytics standpoint, and more importantly, it's how we manage the business yeah. No I think is going to be very helpful, especially as we get Dcs in there and you know a lot of those.
Pieces of that supply chain. So I think it it is gonna be helpful. So yes.
I will let somebody else hi, Bob so.
No I don't want someone else talk now [laughter] alright. Thank you.
Thank you. Our next question comes from line of Daniel Moore with CJS Securities. Please proceed with your question.
Thanks, Good morning.
Morning, Dan.
I guess, what let's start with I would just one or two real quick number one can you quantify a dollar amount or EPS impact of increased costs for some of the investments you describe network cyber security et cetera, as well as the increased.
Employee benefit related costs in 20 versus 19.
That does any of that this is Jeff good morning that number is approximately $10 million in total.
During the two.
Between the two correct perfect.
And second is more philosophical, but obviously you remain committed to de leveraging which I know a lot of investors appreciate given that the guidance a little light relative to expectations, you know as well as just incredible powerful cash generation.
Why be quite that rigid shares were to come under pressure for any reason disappointment whatever you know went up being perhaps a little bit more opportunistic and flexible regarding potential buybacks.
Today. This is Jeff again again, thank you for the question I think that's a very appropriate one you know, but I think if you go back and look at what we discussed at Investor Day, I think we're gonna stay very disciplined a very methodical and very intentional with our uses of cash I mean for us we're going to continue to invest for growth from apart.
Today since standpoint.
Thank you to protect the dividend and we're going to continue on the path to reaching our de leveraging commitment that we've made.
To all of our stakeholders and after that whitcomb share repurchases other potential opportunity as well as acquisitions that may come down the path as well so the point as well taken you know, but for US we're going to continue down that sequential path in terms of our prioritization of uses of cash.
Okay understood I'll pass it over thank you.
Thanks, Dan.
Thank you. Our next question comes from the line John Barber with Stifel. Please proceed with your question.
Thank you and good morning.
Well I guess, we'll start with Dcs.
Could you.
Clarify I wasn't clear.
I guess I'm interested in.
Wow items in Q4, and the year I think he said the year was up 11%.
And then of course, you talk about non bedding being a week.
[laughter] I'm curious.
For 2020 in terms of the guide you know if we're looking at I think mid single digits of volume up for you see us how does that sort of break out between non bedding and betting.
Okay, Hey, Josh this is that.
Yeah. So far I think we see the same trend that we saw in 19 in terms of decline in some of the non bedding market, but continued strong opportunities.
In 2020 in a Betty markets, both with that with pure foam mattresses and hybrid mattresses.
And is there any.
Hi, sorry go ahead.
Continuing deflation in 2020, and it and it in some of its gauges that softness in the furniture market and the furniture Ben yes.
Okay. So is the mid single digit guide for volumes for East CS for 2020.
Hi is dove.
Yeah, hi, single or almost double and bedding and declines in non bettinger any help.
John I think that's that's accurate and and that that melt off of non betting and moved to vetting from a margin perspective is good for us remember the non betting tends to be blocks of commodity foam to the most part replaced by a higher value betting related products.
That may be either specialty foam components or finish mattresses. So the answer to your question is yes, we would expect that the betting related side of it would be in the double digit range. The net 5% is a continuation to wendy's point of deflation, which.
Continue through the year, even into the fourth quarter and the the softness of the non bedding business.
Great. Thank you and then and the 2020 guide again on.
It looks like I guess I'm, excluding the exiting out of fashion than in the home furnishings, but is the guide for volume exclusive of the exits also down and if so sort of how much and why.
At the midpoint, it's up about 2%.
And there's an expectation we rattle off all these businesses that are growing mid single digits and you heard that list or Youve something's down.
Yeah. That's a continued expectation of soft demand in the trade steel or industries is the primary driver of that.
Okay. Okay.
And then incredible job working capital in a year and a huge source of cash, particularly in Q4 and accounts receivable, Jeff was there something.
Timing related there or how do we think a buyout.
Either is working capital as a percentage of revenue for 2020 or who went to what's what are some of the big moving pieces on that obviously, it's a tough compare.
Right. Thanks for the question John I mean first of all the team you're right did a tremendous job on working capital I'm doing the course of 2019 that you saw that reflected in the 9.9% ratio. There I mean, there were quite a few yeoman efforts that were contributors in 2019, especially the combination of liquidating inventory or they actually.
Businesses that we've highlighted during the call I'm an increased overall in the focus of inventory level reductions you saw the deflation or raw material costs throughout the course of 29 theme that also contributed to that.
Think about 2020, John for US you know the the rigor and the focus will not change or will not let up at all as it relates to our working capital efforts in improvement, but we don't see where we would have as many of those significant huge wins that we saw in 2019 and 2020, However, again.
Focus will continue to be there and we'll continue to drive that result, as best we can across the organization.
Great and my last question is just sort of this high level of focus.
That's taking hold.
The investment side of the were on on P.S.G.
And I'm wondering I'm kind of where are you are internally thinking about that whether you've hired.
Consultant or or or sort of measuring yourself.
What early inning gleaning as you may have on that but we might expect going forward. Thank you.
Yeah, Hi, John This is Wendy yes, we are working on it he we hope that the finalize our first sustainability report sometime in 2020, we are working listen external consultants to help us as you know we we feel like we've long been doing the right thing and have a really strong story.
To pounce on any assay perspective that gathering all that information from I'd just different businesses around the world has had been a challenge in so we have some help add to do that so where he thinks that the question. We're looking forward to being able to issue that for sustainability report, but there's a lot of work going on across the company.
On their factories every day not.
In order to report Crazy I see that because it's the right thing to do in our business.
We are going to be pleased to be able to report them later this year.
Great. Thank you and good luck.
John.
[noise]. Thank you. Our next question comes from the line Bobby Griffin with Raymond James. Please proceed with your question.
I want anybody. Thank you for taking my questions and hope everybody is doing well, but I'm just quick I want to see was I wanted to go back to your comments about the progression for the year just to make sure I'm grass when it correctly, but for one Q based on the steel a sequential kind of inflation that you're seeing from steel on the input side, we would want to model or the expectations for.
One Q EBIT margins to be down year over year, and the low point of 2020.
We would.
We were year over year in the first quarter expect.
The each of the quarters, not just the first quarter, but each of the quarters to be.
Maybe in line with or slightly below what the prior years quarter was that means sequentially. It goes down from fourth quarter to first quarter because of this deal is she is a car always talking about and just normal seasonality frankly, with our fourth quarter to first quarter in that business or.
Across the businesses, Okay, and that would mark I would probably at the low point to your question the low point being the first quarter. That's right. Okay. Okay. That's helpful and I and I realize you guys are still doing some of the initial work on on what the potential impact could be from the buyers, but can you maybe just remind us of what products are produced in China that are consume.
Back by the U.S. consumer because I know typically you set up your production as produced in the local country consumed by the local country. So any color on that would be helpful.
Good morning, Bobby This is that you happy to comment on that so we have 16 plant as we mentioned in China are probably the biggest China to U.S. Chip may comes in our home furniture business are there some of that that's.
Consumed by our customers in China. It converted to finished goods and then comes to the U.S. as well as event that stretch it for us from China to the pivot to the U.S. and that we had on 10 automotive plants in China and as you mentioned, you're primarily those are local production for the local market.
But there is some portion of our of those goods, particularly voters actuators that are consumed all around the world, including Europe and the U.S. So those are probably the two largest impact or there's a small operation on the work furniture side that has shipments to the U.S.
But oh furniture automotive are probably the biggest exposures.
Okay. That's very helpful and I guess lastly from me a Mitch I think this would probably be back towards you again, but I can can you maybe comment a little bit of detailing on hydraulic cylinder suite, we had another decline.
I'm in the fourth quarter, maybe what would happen over the last two quarters in that business and then maybe the outlook going into a 2020 for for that that growth area.
Okay Bobby sure.
Yeah, it's been it's been a bit tough sales were really strong in hydraulic cylinder is from the second quarter of 18 through the second quarter of 19, and then really began to fall off rapidly our customers who are really the leading forklift producers and started forecasting significant demand drops of 15% to 20%.
And that's really what we started to see in Q3 and again saw that accelerated in Q4 on it we don't have lot of great data, but the industry data. We do see shows that shipments were down over 20% in the fourth quarter, so pretty much in line with that with where we were up and down 13% for the full year again with that.
I'm kind of accelerating decline trend in the fourth quarter.
We expect some of this impact to continuously look into 2020, probably you know at this point would see would see sales year over year down in that low double digits.
I appreciate all the detail best of luck a in one Q on in 2020.
Thanks, Bob.
Thank you. Our next question comes from the line of Keith Hughes with Suntrust Robinson Humphrey. Please proceed with your question.
Thank you.
It's a question on pricing you talked about the raw material shift throughout this call with a pricing you can be putting on your customers coming in April I think you're talking about spring related products. There can you talk about your phone products what pricing.
Looking like a going into a new year necrotic.
The <unk>.
It's like steel, it's hard to forecast, but we think that the the foam chemical inputs have stabilized there was a little bit of a continued deflation in the fourth quarter, but at a much lesser rate. So we think it's near bottom Keith or frankly, not a lot.
I have room to go Corona virus may have some impact on it but we think we're at bottom, but we have not seen any signs of recovery. So in steel. We certainly are seeing inflationary cycle, we do not have that call on phone chemical inputs.
Okay.
Second question.
[laughter] excuse me.
On the shape of the year.
Is the life, so impact going to be spread out evenly over the year or is that a court.
Quarter by quarter sort of determination based on where inputs of moves.
He keeps we're starting the year with zero like though in 2020, so nothing else changes like though purely as a standalone the element would basically unwind from last year. So we it in quarter to quarter it increased a little better.
First quarter second quarter to third quarter in fourth quarter.
We can provide this amounts to you if you if you need the extra yeah, probably get those from yeah, I'll, probably get those from when they offer offline.
Got it.
We don't I mean.
We don't know Keith will update our life Alaskan and you know as inquiries for graph, but it's way too early to make a call.
Yeah, I didn't know if you other crudes something.
And then make adjustments to the accrual as time went a longer distance, it's just that happened sounds like water.
That's how it works keep at it but again because it's so early in the year, it's too early to make a call on where we think steel and probably you know that the cost of our steel inventory will be at December 31st and that so that doesn't accordingly adjustments, we make in any true it up at the end of year.
Okay final question.
On the home furniture products, even you've been moving where this is there.
Where are you in this process you called that out it's kind of a negative for the year I thought that was mostly done has as something else might come up on the radar that you just don't want it anymore.
But this is Mitch key no you're right. It is it is substantially complete on the restructuring.
We just aren't yet we're we're looking at the year over year comparisons. We will continue to have show some decline from a revenue standpoint, and as Carl mentioned will face that it particularly in the first half of next year as well, but from that point of that restructuring around improving margins and earnings that's been very successful teams done a great job.
There.
Yeah.
And file on that when you when you think about steel moving from a deflation to an inflationary environment. You'll remember the last time, we went through this cycle, we had a hard time passing through steel inflation in a portion of our home furniture business that we no longer participated.
The side of the business and in fashion bed, which we no longer participate in so we feel that as we move into this deal inflationary cycle. Our company is better position and the pricing power that we had years ago. We now have again.
And with a lot of good work at home furniture yet.
And from I guess going forward, just add ons fashion bad debt exit it will be particularly as we go into next year. Those are significant dollars. It just don't repeat.
Okay. Thank you.
Thank you, ladies and gentlemen, as a reminder, if he'd like to join the question Keith. Please press star one at this time.
Next question comes from the line of Peter Keith with Piper Salmon. Please proceed with your question.
Hi, Thanks, a lot good morning, everyone I did want to dig into the auto business. Because you guys have actually done quite well there the last two quarters.
I think with gold market down five you guys rebates and now you're you're back to outperforming the.
The industry by over 1000 basis points.
Could you help us understand what's going on with some of that outperformance and if there's any ongoing a continuation of that.
Yeah sure sure Peter this is Vince.
Yeah I'll answer it was taking the basis point that thousand base my target [laughter], killing it yeah, right, that's not where great great timing.
No I think we're glad that we did that I mean, as we said before it really is a a long term target and we think it's fair to look at ourselves against your how the overall markets performing but again, that's a longer term how to basis. Yeah. We did have stronger Q3 Q4 as we expected right is early in the year. This tough.
To have confidence in us, but yeah. We think we came through with what we expected and I think we continue to see that same kind of optimism in 2020.
You know right now I think we'd see somewhere mid single digit improve improvement year over year for 2020 with the market right. Now you know flat to down half or 1%, who knows I think that will continue to move around a bit that yeah. We continue to to have.
Strong gains continent, and and new products. So they remain very positive on that business.
Okay. Thank you and then I wanted to ask 'em a question around spraying and also the the adjustable bases. So the the U.S. spring business accelerated sequentially, but the raw material headwind also picked up notably said I.
If I remember correctly I think you did a cut prices at the beginning of Q4 so.
The two part question would be does that imply that the units of spring, which I know you don't report anymore. It did that accelerate it with the fourth quarter.
And then on a related note why did the the adjustable base business pick up so strongly in Q4.
Yeah, I'll take the mattress units its related content story, it's you know for us to run 62% comfort core as Mitch said and then the connectivity to an increasing adoption of quantum edge. So it's it's dollars or significantly outpacing units.
But on a joke, yeah on adjustables, yet very strong quarter up up over 20%.
But it's also you have to look into it with it was strong it's been strong for the last few quarters and they outsized year over year comparison is in part because of the very weak Q4 and 18.
So the run rate was good but you know pretty consistent with what we've been seeing for last few quarters.
Okay.
And lastly from me just on but just trying to understand the timing of about price cuts and price increases so.
Are we corrected it was the beginning of Q4, there was a price cut now there's another one and at the beginning of Q1.
And not be followed by a a price increase in April I guess I'm pretty good at is that that raw material headwind looks like.
It could have a I'd get worse than in Q1, and then start to stabilize in in Q2 Q4, they you're exactly right based on what we know today.
Sure.
Absolutely effort.
Okay. Thank you very much guys.
Thank you Ben Thanks, Peter.
Thank you. Our next question is a follow up from the line of Bobby Griffin with Raymond James. Please proceed with your question.
Thank you for let me ask one more just want to quickly touch on the fabric in flooring product segment, how did that performed during the quarter and is we haven't talked about in awhile, but as that business still kind of the same strong cash flow generation business that we used to talk about as before.
The answer is yes that its a really good business that consumes very little capital mentioned and the team have done a really good job of winning those businesses out from a working capital perspective, so a greater focus there but in flooring.
Case, it's slow growth a matter of fact, we would call it probably overtime.
Carpet adapt adoption is probably negative 2% to 3% of year, but it's gets returns on capital employed are very very high. It's a it's the proverbial cash cow, it's a good business.
The fabrics business is somewhat similar to that with the exception of Geo components, which we continue to invest in is performing very very well.
Okay I appreciate that Ah. Thank you for the epic.
Hello.
Thank you. Our next question is another follow up from Susan Mcclary with Goldman Sachs. Please proceed with your question.
Hello again.
Susan.
Oh, you know, calling your remarks, he said that you're aerospace volumes were up 11% in the quarter can you just give us any color. There has there been any disruption as it relates to obviously some of that the issues at the Oems are it's been having this year with some of their models and you know how are you seeing the health of that supply chain and how we should be.
Thinking about that for 20 Tony.
Susan I, just read numbers, Mitch is going to [laughter], sorry, let me talk.
[laughter].
That is [laughter].
[laughter], yes, so what we actually haven't seen disruption so far of course, the Boeing 737 backs production Hall is big news in the industry, but the supply chain deep the supply chain had been struggling to catch up for a long time and so while they have stopped production.
It really hasn't impacted us at this point.
We also seen really strong production on some of the engine platforms that were on remember we service not only Boeing but the ebay Airbus planes as well and so that's really what has been driving our strong growth in the last couple of quarters, particularly in our on our fabrication facilities in the U.S. and.
In Europe.
We see that continuing into into 2020, I think that right now our outlook is for low double digit growth there and aerospace continuing.
Right right very good thank you.
Thank you.
Thank you, ladies and gentlemen that concludes our question and answer session I'll turn the floor back to Miss Watson for any final comments.
Thank you everybody for your attention in questions. This morning, and we will talk you again next quarter.
Thank you. This concludes today's teleconference. You may disconnect. Your lines at this time. Thank you for your participation.